Improved margins helped the terminal maker VeriFone Holdings Inc. shift into the black in its fiscal third quarter, despite a sharp decline in revenue.
The San Jose company reported a profit of $21.9 million in the quarter ended July 31, compared with a $7.2 million loss in the same quarter a year earlier. Revenue fell 18.4%, to $211.2 million.
Improvement in the gross margins helped the company turn a profit, according to Robert Dodd, a senior analyst at Morgan Keegan & Co.
"In the prior two quarters VeriFone had significant charges to get rid of obsolete products and eliminate excess components," he said. "The costs to do that dropped significantly in this quarter."
Dodd said the first-quarter charge was about $12 million followed by a $9 million charge in the second quarter. In the third quarter that charge was about $1 million, he said.
Douglas G. Bergeron, VeriFone's chief executive, said demand for his terminals is picking up in several important markets.
In China, VeriFone has been migrating customers to its Vx product line away from Lipman Electronic Engineering Ltd.'s Nurit product line, Bergeron said. VeriFone bought rival terminal maker Lipman in 2006.
"Fulfilling customer demand with the Nurit product, one of the few electronic products imported into China, had created a cost-structure disadvantage, which has now been removed," Bergeron told analysts during a conference call.
VeriFone won contracts with a United Kingdom merchant acquirer and with Oi Paggo, a unit of Brazilian telecommunication firm Oi, for services to help it with a mobile payments service.
Canada also showed more demand for terminals, Bergeron said, as the country migrates to chip-and-PIN cards.
Revenue increased 23.6% in Asia, to $24.6 million, but fell in other regions.
Revenue in the United States and Canada was $88.9 million, down 8.8%, and revenue in Europe declined 17.1%, to $67.1 million
Latin America revenue slipped 49.3%, to $30.6 million.
Bergeron said sales to one of the two major Brazilian acquirers that together accounted for 60% of VeriFone's business in 2008 slipped because of a delay in completing application software.
Analysts were generally pleased with VeriFone's results.
"Revenues were modestly better than estimates and more importantly, gross margins were well better," said George Sutton, a senior research analyst at Craig-Hallum Capital Group LLC. "VeriFone called the most recent quarter as the bottom in the market, consistent with what the other vendors have also been suggesting."
Gil Luria, an analyst with Wedbush Morgan Securities in Los Angeles, said that "management's outlook also improved and they even think they can grow 10% in their next fiscal year."
VeriFone also announced Tuesday that it had reached a settlement with the Securities and Exchange Commission over the agency's inquiry into VeriFone's 2007 restated results. In December 2007, VeriFone said that it was restating its revenue for the first three quarters of 2007 because of an accounting error, which was resolved by August 2008.
"The SEC's complaint recognizes that the company's restatement resulted principally from incorrect inventory accounting adjustments made by a former employee, but does not accuse the company of intending to misstate its financial results or to mislead anyone," the company said.
